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Blockchain in financial services: A threat or an opportunity

Blockchain in financial services

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Although, blockchain has been in existence since 2009, it garnered mixed reviews from the industry in its early years. It has now been taken up as a new innovative model globally. Blockchain can be defined as a way of initiating and verifying transactions in a distributed environment. The decentralized record keeping and reporting functionalities promise opportunities in reducing cost, fraud and increasing speed of transactions. With initiatives such as R3CEV, leading banks are battling their way for developing blockchain applications, thereby enabling a change in the traditional financial systems.

Overall, the global investment in blockchain has exceeded USD 1 billion in over a thousand start-ups and is expected to increase four-fold by 2019, growing at a CAGR of 250 per cent. A notable example is the funding received by Coinbase and Circle exceeding USD 240 million in 2015. Seeing the pace and magnitude of venture funding flowing into blockchain FinTech companies, it is quite certain that changes may be reflected in the economic scenarios and mainstream very soon.

A major factor for innovation in this space is the emergence of permission-less platforms enabled by public blockchain e.g. bitcoin. These have laid down the road for replacement of traditional centralized systems by Internet of Money. Such has been the emergence of blockchain that over 700 alternate currencies have tried to establish themselves on the model of Bitcoin.

Till now there was wide acceptance of public blockchain, but of late disagreements have begun to crop up on this technology being ‘enterprise friendly’. Global bankers are looking for more agile, cheaper and faster distributed consensus mechanism enabled with requisite permissions. This has led to the emergence of new types of blockchain, extensions on existing blockchain and the introduction of other Distributed Ledger Technologies (DLT). Some of the areas where the use of DLT have been practised are trading of shares of private companies (NASDAQ in collaboration with Chain), solution for streamlining the process for loan syndication (digital assets holding) and many more.

Globally, significant investments have been seen in FinTech companies involved in transaction processing, exchange and transmission of digital assets. We expect the next wave of funding coming in the way of companies focused on building commercial APIs and tackling clearing and settlement cases. Enhancement of international payments systems and digital identity are other areas where the technology offering is being adopted by several banks.

This article is an excerpt from our Thought Leadership document "FinTech in Nigeria: Understanding the value proposition" . Click here to download the publication.